Delaware Judge Strine: 'I'm Not Going To Give Big Fees For Junk'

Daniel Fisher
,
Forbes Staff
I cover finance, the law, and how the two interact.

Judge Leo E. Strine Jr.

Judge Leo Strine of the Delaware Chancery Court said he sympathized with corporate directors who are hit with lawsuits after virtually every merger announcement today, but he won't hesitate to approve big fees for lawyers who negotiate big settlements. More than 90% of corporate mergers worth more than $100 million now draw one or more lawsuits accusing directors of fraud or other improprieties.

"I'm not going to give big fees for junk," said Strine, Chancellor of Delaware's corporate court, which hears many of the most influential lawsuits involving allegations of corporate wrongdoing. "I lose no sleep for rewarding plaintiff lawyers who get real money for the shareholders."

Strine was speaking at the U.S. Chamber's annual "Legal Reform Summit" in Washington. The title of the gathering reflected the politics of most of the people in the room: "Courthouse or Cash Machine?" And the always-entertaining Strine had nothing nice to say about lawyers who file so-called "disclosure suits" seeking minor changes in the public filings companies file in connection with a merger. Many of them file suits seeking a quick fee and "puke out" after a year or so when it's clear the court isn't going to give them one, he said.

"What does trouble me is the hundreds and hundreds of lawsuits where the only beneficiary is the trial lawyer," Strine said.

Strine sat on a panel with W. Neil Eggleston, a partner with Kirkland & Ellis who said he now goes through a familiar pattern with clients considering a corporate acquisition. He warns them that no matter how many precautions they take, including allowing only independent directors to vote on the terms, and ensuring competing bids were considered, the company will be sued, probably within 48 hours.

"The first reaction is, `we're not going to get held up on this,'" Eggleston said. But as time goes on, the board gets more worried about the uncertainty of completing the merger and the cost to shareholders if it allows the litigation to drag on. Finally they agree to settle, usually by paying a nuisance amount in fees to the lawyers and minor wording changes in the terms.

Strine agreed such nuisance suits are a problem, especially since lawyers have now mastered the art of filing competing lawsuits in multiple jurisdictions to make it harder for their targets to fight them. "They almost play like a tag team," Striine said. "You think they're fighting with each other, but it's almost a triangulation."

Defendants bear a lot of the blame for these settlements as well, however. Since they face the same lawyers over and over, both sides have worked out a simple bargain: In exchange for fees, the plaintiff lawyers sell absolution in the form of a blanket settlement of their claims.

"There are defense lawyers who have looked at me with piteous eyes and said `don't blow up our deal,'" Strine said. "For $375,000, we can get a global release -- which sounds like something Sting would have enjoyed -- and move on."

Strine called the proliferation of securities litigation a serious threat to the U.S. economy since it encourages companies to incorporate in other countries. And he expressed scorn for judges in other states who hang on to cases that would be better heard in Delaware. He told the attendees they need to pressure big institutional investors like Fidelity and Vanguard to "get off their duff" and press for changes in corporate bylaws that would require disputes over mergers to be heard in a company's state of incorporation.

"Most of these deals are the result of an active search process led by an independent board," Strine said. "So why do they sue? Usually it's an investor's dream. I can tell you Fidelity and Vanguard would welcome that deal."